Asian stocks experienced gains on Monday, driven by a rally in regional chip shares after China banned certain purchases from Micron Technology. However, Wall Street futures struggled as negotiations surrounding the U.S. debt ceiling approached a critical point after stalling the previous week.
European markets were anticipated to adopt a cautious stance, with pan-regional Euro Stoxx 50 futures pointing to a flat open. S&P 500 futures remained relatively unchanged, while Nasdaq futures saw a slight increase of 0.1%. President Joe Biden and House Republican Speaker Kevin McCarthy were scheduled to meet to discuss the debt ceiling, with less than two weeks remaining before the June 1 deadline, after which the federal government is expected to face difficulties in meeting its financial obligations.
Failure to raise the debt ceiling would result in a default, potentially causing turmoil in financial markets and a surge in interest rates.
The Nikkei 225 index of Japan rose 0.8%, the KOSPI in South Korea rose 0.7%, and the Hang Seng index in Hong Kong gained 1.3%. Sentiment was also boosted by President Biden’s optimistic remarks about the prospect of improved relations with China in the near future.
China’s decision to prohibit Micron from selling memory chips to key domestic industries due to security concerns benefited stocks of Micron’s rivals in China and elsewhere. Mainland firms sought alternative sources for memory products, boosting the prospects of these competing companies.
Meanwhile, concerns over the upcoming U.S. debt ceiling negotiations persisted. Chris Weston, head of research at Pepperstone, commented on the need for greater market volatility to facilitate a deal. Talks broke down on Friday, leading many to believe that an agreement may not be reached until the June deadline.
UBS chief economist Jonathan Pingle identified the Japanese yen and gold as the assets best positioned to benefit from a U.S. default. He suggested that only a month-long impasse following the X-date would cause a significant tightening of financing conditions, leading to a strong rally in the dollar.
Debt ceiling concerns affected the short-end of the Treasury yield curve, with investors avoiding bills that mature when the Treasury’s funds are at risk of depletion. The yield on the 1-month Treasury bill rose by 15 basis points to 5.6677%. Two-year yields decreased by five basis points to 4.2387%, retreating from a recent two-month high, while the 10-year yield dipped four basis points to 3.6536%.
Data on U.S. personal consumption expenditures (PCE) will be released on Wednesday, while data on inflation will be released on Friday. Market dynamics are still impacted by concerns about the debt ceiling, particularly in the Treasury market.